Tight times ahead for software industy will favor innovation

As it comes to the end of 2007, the dreaded market outlook surveys are starting to appear (Don't worry we will be putting out our own 08 predictions in the near future!).

According to IDC reported in Information Week, 2008 will show lower growth in IT spending than in 07. In particular, there will be a lower rate of growth in the US (3%-4% compared to 6.6% this year).

InformationWeek's coverage highlights an interesting prediction: SaaS vendors may suffer more if the downturn is prolonged than license vendors as their fixed costs (infrastructure and support) are proportionately higher.

This may appear to be an ironic twist on the supposed resilience of the SaaS business model. The downside of renewal business is that people may not renew or more likely downsize their commitment.

If SaaS companies do suffer, I suspect that it will be more to do with maturity than an underlying weakness in the model: Recent SaaS entrants will need to get used to the business cycle and cut costs accordingly.

The article also reports the prediction of continued above average growth for Oracle.

I suspect that the other giants will also do well in 2008 as smaller vendors get squeezed between an increasing tendency among procurement to consolidate on a handfull of vendors and the downward pressure on software license pricing in general.

Start-ups in particular will be under pressure as there is likely to be a reduction in spending among the large banks resulting from the sub-prime issue and this is a sector that has traditionally fostered start-ups.

However, this sectoral tightening will simply reinforce the trend among start-ups to focus on the telcos and the government sector.

Surprisingly finally after all that doom and gloom, I am not actually pessimistic about the impact of a spending slow down if one occurs.

Tightened markets can also favor innovation over financial firepower: As some customers become more interested in finding something different to get an increased return, those vendors who actually have something new and are capable of putting up with increased sales cycles will continue to sell and thus will be well placed when markets expand again.